Q&A Discussion Forum For CompensationStandards.com

Q: Under Item 402(k)(2)(vii)(D), a company must include in the "All Other Compensation" column of the Director Compensation Table amounts paid or accrued to any director pursuant to a plan or arrangement in connection with: (1) The resignation, retirement or any other termination of such director; or (2) A change in control of the registrant. The SEC states on page 80 of the release that distributions of nonqualified deferred compensation are not reportable as "All Other Compensation" in the Summary Compensation Table. I am assuming that these amounts do not have to be disclosed because they will be included in the Nonqualified Deferred Compensation Table for the NEOs. Because the NQDC Table is not required for directors, do you think that if a director retired during the year and received payments from the Company under his deferred compensation plan that all such payments must be disclosed in the "All Other Compensation" column of the Director Compensation Table (as per Item 402(k)(2)(vii)(D))? It seems like disclosing this amount in the "All Other Compensation" column would be repeat disclosure of compensation received in previous fiscal years because if a director deferred compensation in previous fiscal years, such amounts would have been disclosed in the appropriate column in that year. Likewise, contributions by the Company to a defined contribution plan would have been disclosed in the relevant previous fiscal years. Thanks in advance for your thoughts.

RE: I realize this question has remained unanswered since January 2007; however, I am bumping this question on the off chance someone reads this now and decides to provide insight or guidance. Thanks in advance.
-4/1/2020

RE: In my limited experience, I have not seen deferred comp distributions to retiring directors disclosed in the director compensation table. Here's Sysco's 2019 proxy statement, which discloses a director deferred comp plan that pays out on retirement, along with disclosure that two directors listed in the comp table retired during the year. While there was disclosure about above-market earnings on the deferred comp for one of the retiring directors, there was no reference to a payment or an accrual under the plan.
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 4/1/2020

Q: If a named executive officer elects to invest deferred compensation amounts in a hypothetical cash account which earns a return rate based on a corporate bond yield average as published by Moody’s, would such earnings be treated as above-market earnings and thus reportable under Item 402(c)?

RE: For a deferred compensation plan with a cash-based, interest-only return, earnings aren't reportable as “above-market” unless the rate of interest exceeds 120% of the applicable federal long-term rate. See Instruction 2 to Item 402(c)(2)(viii). For more detail and Staff guidance, see Chapter 6 of The Executive Compensation Disclosure Treatise.
-John Jenkins, Editor, CompensationStandards.com 3/12/2020

Q: Compensation Committee plans to adopt resolutions to increase the number of shares reserved for issuance under a plan and make awards under the plan that would require the increased number of authorized shares be available (but awards would be contingent on stockholder approval of amendment). Is there any restriction on the Company's ability to file an S-8 covering the increased number of shares reserved for issuance prior to the date the resolutions are adopted (to ensure that the S-8 is effective when the awards, which may include restricted stock, are made)?

RE: The one potential issue that I see with this is the need to file an Exhibit 5 opinion with the S-8. However, the Staff does generally accept Exhibit 5 opinions that assume shareholder approval of a required amendment to charter documents will be obtained. A clean opinion is required to be filed via post-effective amendment or Form 8-K. I assume the same principles would apply to a plan amendment, but have not seen anything directly addressing that. See Staff Legal Bulletin No. 19.
-John Jenkins, Editor, CompensationStandards.com 3/3/2020

RE: Thanks. We would typically phrase our opinion to read: " … the Shares have been duly authorized and, when the Shares are issued by the Company in accordance with the terms of the Plan and the instruments executed pursuant to the Plan which govern the awards to which any Share relates, the Shares will be validly issued, fully paid and non-assessable..." Before the plan is amended, the additional shares cannot be issued in accordance with the terms of the plan and thus the opinion regarding "validly issued, fully paid and non-assessable" would not need to be made subject to any additional express assumption. Once the plan is amended and the additional shares can be made the subject of awards (with any award agreements being made contingent on receipt of stockholder approval of the amendment), the opinion regarding "validly issued, fully paid and non-assessable" would apply to those additional shares. Do you see that distinction as creating an issue regarding the sufficiency of the Exhibit 5 opinion?
-3/3/2020

RE: In the highly unlikely event that this ever became an issue, I don't know how the Staff would interpret the use of the phrase "duly authorized" in the opinion in this particular context. Obviously, your intention is to simply address the corporate law issue of whether the shares have been duly authorized, but there may be some potential ambiguity in using that term in the context of an S-8 covering shares that need a plan amendment in order to be issued.
-John Jenkins, Editor, CompensationStandards.com 3/3/2020

Q: Have any of your clients reached out with questions about how to set performance-based compensation targets for 2020 given the uncertainty around coronavirus? Our client, a large cap pub co., will have a couple of targets it will be setting in the near future, revenue and adjusted EPS targets for the bonus and a free cash flow target for performance share units. Thank you.

RE: For what it's worth, one of the issues that I've seen companies grapple with is the possibility that whatever targets they set now, they may find themselves wanting to preserve the flexibility to adjust them in the future due to the uncertainties created by the outbreak. Adjusting targets is obviously something that many investors and proxy advisors are extremely skeptical about, but for many companies, there's legitimate concern that pegging targets now may turn out to be the equivalent of trying to catch a falling knife.

One of the things companies may want to consider is flagging the potential implications of the coronavirus on 2020 targets in their CD&A discussions of post-2019 compensation decisions, and providing some disclosure about the possibility of further adjustments, if that's something the comp committee wants to be able to consider.
-John Jenkins, Editor, CompensationStandards.com 2/28/2020

Q: A Nasdaq-listed company has a Compensation Committee that satisfies the composition requirements of Rule 5605(d)(2) of the Nasdaq listing standards. The Compensation Committee determines the compensation of the company’s CEO and certain other executive officers, but has delegated to the CEO the authority to determine the compensation of two executive officers. Does this delegation of authority by the Compensation Committee to the CEO violate the requirement in Rule 5605(d)(1) of the Nasdaq listing standards that the Committee’s charter must specify its “responsibility for determining, or recommending to the board for determination, the compensation of the CEO and all other Executive Officers of the company”? Nasdaq’s rule releases in 2002 and 2012 (NASD-2002-77 and NASDAQ-2012-109) suggest that the Compensation Committee must either determine the compensation of executive officers or recommend such compensation to the Board for its determination. Would such a delegation to the CEO be permitted if the Compensation Committee imposed certain limits on the CEO’s authority (e.g., a maximum percentage by which the CEO could increase base salaries or a maximum target bonus amount that the CEO could establish)?

RE: I don't think blanket delegation of authority to the CEO to set the compensation of other executive officers can be reconciled with the requirements of Rule 5605(d)(2). While the CEO can certainly make recommendations to the Committee regarding the appropriate compensation levels of the other executives, I think that the actual compensation "must be determined, or recommended to the board for determination" by the Comp Committee.

The CEO's role in setting comp for other executive officers should be laid out in the Comp Committee's charter. Here's an example from McKesson's charter that contemplates an active role for the CEO in the compensation process:

"For all executive officers other than the CEO, the Committee, in consultation with the CEO, will annually review and approve the corporate goals and objectives relevant to executive officers’ compensation. In light of these goals and objectives, the Committee, in consultation with the CEO, will determine (i) the salary paid to executive officers, (ii) the grant of cash-based bonuses and equity compensation provided to executive officers, (iii) the entering into or amendment or extension of any employment contract or similar arrangement with executive officers, (iv) executive officers’ severance or change in control arrangement, (v) material perquisites provided to executive officers and (vi) any other executive officer compensation matter that may arise from time to time as directed by the Board. In determining the long-term incentive component of executive officers’ compensation, the Committee will consider the same factors pertaining to such compensation that it considers for that element of the CEO’s compensation."
-John Jenkins, Editor, CompensationStandards.com 2/11/2020

Q: Would you please direct me to any CEO pay ratio disclosure that discusses a decision to change, or not to change, the median employee used the prior two years because of a change in the employee population caused by the sale of a subsidiary? I assume that the discussion would include an explanation of whether management considered the change in the employee population related to the sale to be significant. Any guidance that you could provide would be most appreciated. Many thanks.

RE: Check out Coca-Cola, which changed its median employee due to significant changes in its employee population due to dispositions and acquisitions:
-John Jenkins, Editor, CompensationStandards.com 2/4/2020

RE: Thanks very much for the extremely quick and helpful reply. Great service, as usual.
-2/4/2020

RE: You're welcome!
-John Jenkins, Editor, CompensationStandards.com 2/4/2020

Q: If a company gives gift cards (less than $100) to its employees (including its NEOs) for the holidays, is there any guidance or practice under which this can be excluded from the summary compensation table as de minimis (or for another similar reason)? Thanks.

RE: No, I don't think so. In fact, I've seen some ridiculously small gift cards reported in summary comp tables.

One for Moderna includes $200 gift cards given to its NEOs and even breaks them out separately in a footnote.

Nike doesn't break out the dollar value, but it also calls out "nominal" gift cards in the footnotes to its summary comp table.

Overstock not only put $250 gift cards in its summary comp table, it discussed them in its CD&A!
-John Jenkins, Editor, CompensationStandards.com 2/4/2020

Q: In our client's proxy the executive compensation section contains five NEO's, two of which did not receive an increase in base salary, while the other three did receive increases. Are we required to disclose that two executive officers did not receive an increase in base salary or can we remain silent with respect to such two executive officers in our component of base salary breakdown? If we are required to disclose are we required to give an explanation as to why the NEOs did not receive an increase?

RE: It's difficult to answer questions about CD&A disclosure in the abstract, because they are invariably highly fact-specific. However, Item 402(b) requires the CD&A to address all material elements of the registrant's compensation of its NEOs. Item 402(b)(2) lists information that may be material, and included in that list are "the factors considered in decisions to increase or decrease compensation materially." If the changes in base salary are material, I think this line item indicates that the reasons for decisions about those changes need to be addressed, and would expect that this discussion would likely need to address reasons why certain officers received adjustments when others did not.
-John Jenkins, Editor, CompensationStandards.com 1/15/2020

Q: I'm in the process of completing the annual review of our compensation committee charter and want to clean up language related to 162(m). Assuming that a company concludes that no covered employee may have compensation payable under a written binding contract in effect as of November 2, 2017, is there any reason under the TCJA's transition rule or the recent IRS guidance that a compensation committee member must qualify as an outside director? The charter would continue to require, of course, that committee members must qualify as a non-employee director under Rule 16b-3(b)(3)(i) and satisfy the applicable NYSE independence requirements. We've kept the references to 162(m) in the committee charter for the past two years out of an abundance of caution and would like to delete them unless there is a compelling reason to keep them. (As a practical matter, all current compensation committee members qualify as outside directors.) Thanks very much.

RE: I ran this one by Mike Melbinger, our resident 162(m) expert. He says there's no reason that a compensation committee member must qualify as an outside director.
-Liz Dunshee, Editor, CompensationStandards.com 1/13/2020

Q: If we granted option awards in 2019 with a two year vesting cliff, would we include those in the relevant columns in the summary comp table? Would we also include them in calculating the PEO Pay Ratio FY 2019 or would we solely include those in the proxy statement FY 2020?

RE: Yes, they would be disclosed in the year they were awarded, even if they haven't vested. The vesting arrangements would be taken into account in determining the grant date fair value under ASC 718. Under Item 402(u)(2)(i), the “total compensation” for the CEO used in the pay ratio calculation is generally required to be determined in the same manner used as the Summary Compensation Table (under Item 402(c)(2)(x)).
-John Jenkins, Editor, CompensationStandards.com 1/8/2020

Q: Assume these facts: A public company's EGC status expired sometime in the prior fiscal year. The company was an EGC for more than two years. The company continues to be a smaller reporting company/SRC. Early in the next fiscal year (during the 12 month period during which the company would be required to take their first say on pay vote pursuant to rule §240.14a-21(a) and Instruction 4, but well before they file their proxy statement for their annual stockholder meeting), said company enters into a merger agreement to be acquired by another public company, and in connection with that merger will be filing a merger proxy statement. Assuming only a special meeting to approve the merger is held, and no votes in respect of the election of directors etc. are being taken, no 402 disclosure should be called for under Schedule 14A since Item 8 is not triggered. However, if the company will be delisting after the merger which is expected to close prior to their 10-K due date and also prior to their annual meeting so that the Company's stockholders never will have the opportunity to take the say on pay vote that would have otherwise been required by Instruction 4/ rule §240.14a-21(a) as noted above, is there an argument that the merger proxy should have included 402 disclosure (and an accompanying say on pay vote) based on Note A to Schedule 14A which says that where any item calls for information with respect to any mater to be acted upon and such matter involves other matters with respect to which information is called for by other items of this schedule, the information called for by such other items shall also be given. Could that Note A instruction be read as to mean that Item 8 information should be provided along with an accompanying say on pay vote since the executive compensation disclosure "relates to" the golden parachute disclosure called for by Item 5 and the shareholders will never otherwise have an opportunity to vote on the company's executive compensation for the prior fiscal year (even though they will take a vote on the golden parachute disclosure)? Or is that way overthinking it and is the to-be-deregistered company off the hook for the prior years 402 disclosure and never has to take a say on pay vote?

RE: I haven't seen anything from the Staff interpreting the scope of Note A, but my sense is that it shouldn't be read that broadly - and the merger proxies that I've seen routinely include the advisory say-on-parachute vote without including Item 402 comp data. Even if Note A could be read to require Item 8 disclosure, your transaction does not contemplate the election of directors, which is required to trigger a say-on-pay vote under Rule 14a-21.
-John Jenkins, Editor, CompensationStandards.com 1/1/2020

RE: Thank you, John! Much appreciated.
-1/1/2020

Q: Does modifying the CIC definition in an LTIP (to match the CIC definition in other compensatory arrangements) trigger an 8-K filing under 5.02(e)?

RE: I think there's a good argument that if you're making a substantive change to a CIC provision, this is the kind of material amendment that would trigger an 8-K obligation under Item 5.02(e).
-John Jenkins, Editor, CompensationStandards.com

RE: Thanks John, really appreciate it.
-12/13/2019

Q: It being August, I'm naturally thinking about our 2020 CD&A, which is not the way things should be. Our 2019 CD&A was 23 pages long, or 50% longer than the first proxy statement I drafted 25 years ago. Most of us who draft CD&As can likely agree that they are too long and contain much more detail than most investors want or need. Very few investors, whether retail or institutional, actually read them or if they do read them, get beyond the first five pages. Investors become frustrated by trying to extract and understand the most important information, even with the help of graphics and plain English. For issuers with significant institutional ownership, the CD&A is largely irrelevant to ISS and Glass Lewis when determining their say on pay vote recommendations. Would you please point me to a CD&A that is concise (say 10-12 pages, assuming that there is one) yet effective in satisfying the SEC's rules and explaining an issuer's executive compensation program and outcomes to investors and the proxy advisory firms? If there is no such thing, why can't there be? Thanks very much.

RE: Levi-Strauss comes to mind, as does PPG. Mark Borges blogged about both companies' comp disclosures and you should check out some of the other companies that he highlighted in his blog.
-John Jenkins, Editor, CompensationStandards.com 8/6/2019

RE: Thanks very much for the quick reply. Will definitely do so. Much appreciated, as always. -8/6/2019

RE: Kudos to planning in advance and thinking this way. I think that a good, compliant CD&A should be able to be drafted in about 10 to 12 pages. Instead of long, narrative paragraphs and generic, multiple-year boilerplate, why can't nearly all of the material information be provided in basic bullet points or charts/tables?

The "what" could be provided very concisely in charts/tables (think salary, bonus and LTI information), and the "why" could be provided in brief bullet points. I also think the other standard narratives (i.e., philosophy, objectives, management/consultant involvement, elements of pay, pay mix, impact of SOP vote, etc., etc.) could be provided in bullet points, or a chart, or other graphic elements.

I think the real issue is that moving from what most companies produce now to a disclosure like that (really short, sweet) would be out of the ordinary and groundbreaking. And who is willing to be the first to try this really short, concise approach (i.e., risk of SEC comments, risk of plaintiff litigation, etc.)?
-9/12/2019

RE: Thanks very much for response. I think that it would be helpful if the SEC mimicked a high school English teacher, as in, "Please write an essay no longer than 2,500 words explaining to shareholders how your executive compensation program works, why your named executive officers received the compensation they did for the performance year, and how that compensation reflects your pay for performance philosophy." Let's be honest- virtually no one reads a CD&A, even if they claim to do so (cf. Finnegan's Wake). Certainly an institutional investor voting 4,000 positions on say on pay is not, your Uncle Joe is not, and the proxy advisory firms, if they read a CD&A at all, only extract certain information necessary to complement their quantitative screens. Because of the involvement of lawyers, compensation consultants, HR personnel, corporate governance experts, and endless "best practices" suggestions, the typical CD&A has become a bloated document that brings to mind the description of a camel as a horse designed by a committee. Not that I mind having a job.
-9/12/2019

RE: Maybe some people are taking your advice. Equilar just published a study showing that the average CD&A word count dropped for the first time in 5 years. Looks like companies may be relying more on graphs of alternative pay calculations to tell their stories:

- 75.8.% of Equilar 100 companies used a proxy summary in the annual proxy in 2018

- The word count of Equilar 100 companies’ CD&A portion saw a decline for the first time in five years, dropping to an average of 9,359 words in 2018

- The number of companies that included a pay mix graph fell six percentage points from 2017 to 2018, down to 78.8% of companies

- After hovering around 77.0-79.0%, the number of companies that included a compensation program checklist decreased by 3.3 percentage points from 2017 to 2018, down to 74.5%

- In 2018, 46.5% of Equilar 100 companies included a graph displaying an alternative pay calculation different from those displayed in the summary compensation table, such as realized or realizable pay
-Liz Dunshee, Editor, CompensationStandards.com 12/5/2019

RE: Thanks, Liz. Are you aware of any CD&A that includes a Q&A section? It seems that approach would be a good way to concisely convey the information of most interest to the proxy advisory firms and major shareholders. This is especially true when an issuer is trying to summarize the shareholder feedback received during engagement calls, how the comp committee responded to it, and where more detailed disclosure can be found.

Best wishes for a very happy 2020.
-12/30/2019

RE: I haven't seen that format specifically, but it does strike me as more user-friendly than a long narrative, and maybe some of our other members will chime in with their experiences.

DFin's annual "Guide to Effective Proxies" also gives many examples of CD&A TOC layouts and executive summaries that are often used to highlight this type of info. Although, here's what Dave Lynn had to say about CD&A summaries in the latest edition of our print newsletter, "The Corporate Executive"

Is a Summary of the Summary Really Necessary?

While proxy statement summaries have become a fixture of the modern-day proxy statement, one continuing area of debate is whether a company needs to include a summary of CD&A in the proxy statement as well. CD&A summaries could be the product of too much CD&A in general, and issuers that employ a CD&A summary should consider whether they could achieve the same objective by just making CD&A shorter and more effective.

A CD&A summary seems like such an anathema because the CD&A disclosure itself was intended to be a summary discussion. When adopting the CD&A requirement, it is unlikely that the SEC anticipated the ten thousand word behemoth that CD&A has become. We believe that a more focused discussion and analysis, when combined with appropriate graphs and charts that demonstrate key principles, would likely obviate the need for a separate CD&A summary that is intended to highlight only the most salient points.
-Liz Dunshee, Editor, CompensationStandards.com 12/30/2019

RE: Thanks again, Liz. I completely agree with David on the dubious benefits of a CD&A "summary", which often turns into a five-page drafting exercise that repeats information found in the CD&A. My point with the Q&A suggestion was that it could replace much denser and difficult to find information on one page right up front. The Baltimore Catechism always worked for me.
-12/30/2019

RE: Yes, I share your view that a Q&A done right would be much easier to navigate than a summary - just haven't seen that highlighted as a trend (yet). I will let you know if I come across any companies who are doing it...
-Liz Dunshee, Editor, CompensationStandards.com 12/30/2019

RE: CVS Health used a Q&A format as part of its 2017 CD&A summary. It got some love from the proxy design gurus, but the company seems to have gone back to a more traditional format in more recent proxies.
-John Jenkins, Editor, CompensationStandards.com 1/1/2020

RE: Thanks very much, John. I checked out the CVS CD&A and it's extremely helpful. Best wishes for a very happy new year to you, Liz, and your colleagues.
1/2/2020

Q: During the fiscal year, an executive officer (that is not an NEO) resigned as a director of the company. He did not receive any additional compensation for his services as a director. Interpretation 227.02 indicates the executive officer does not need to be included in the director compensation table if the footnote or narrative disclosure explain the (former) director is an executive officer. Is your understanding that the outstanding unexercised options and unvested stock awards (set forth in the Instruction to Item 402(k)(2)(iii)) of the executive officer may also be excluded from the disclosure?

RE: Yes, I believe that's correct. You should consider the possible need to disclose this executive's compensation in response to Item 404(a) unless the conditions set forth in Instruction 5 to Item 404(a) have been satisfied. See the discussion on pages 62-63 of our "Related Party Transactions Disclosure Handbook"
-John Jenkins, Editor, CompensationStandards.com, 10/16/2019

Q: It being August, I'm naturally thinking about our 2020 CD&A, which is not the way things should be. Our 2019 CD&A was 23 pages long, or 50% longer than the first proxy statement I drafted 25 years ago. Most of us who draft CD&As can likely agree that they are too long and contain much more detail than most investors want or need. Very few investors, whether retail or institutional, actually read them or if they do read them, get beyond the first five pages. Investors become frustrated by trying to extract and understand the most important information, even with the help of graphics and plain English. For issuers with significant institutional ownership, the CD&A is largely irrelevant to ISS and Glass Lewis when determining their say on pay vote recommendations. Would you please point me to a CD&A that is concise (say 10-12 pages, assuming that there is one) yet effective in satisfying the SEC's rules and explaining an issuer's executive compensation program and outcomes to investors and the proxy advisory firms? If there is no such thing, why can't there be? Thanks very much.

RE: Levi-Strauss comes to mind, as does PPG. Mark Borges blogged about both companies' comp disclosures and you should check out some of the other companies that he highlighted in his blog.
-John Jenkins, CompensationStandards.com 8/6/2019

Q: Is anyone aware of any companies disclosing in their proxy statement that the Compensation Committee determined there existed a conflict of interest with a compensation consultant? I'm just curious to see if there are any. Thanks.

RE: Negative. Mark Borges hasn't seen any yet that have disclosed an existing conflict and how it is being handled.
-Broc Romanek, Editor, CompensationStandards.com 1/8/2013

RE: To be clear, there have been companies that disclose that the Company uses the consultant's firm for other purposes and pays $___ in fees, but these disclosures than conclude - usually after adding reference to the consulting firm's internal policies re conflict - that this is acceptable. They don't say this a conflict but they don't say there isn't one (well, sometimes they say "we are satisfied that . . . "). They just disclose these facts.
- Broc Romanek, Editor, CompensationStandards.com 1/9/2013

RE: And don't forget this ongoing survey I am conducting on this topic: http://www.thecorporatecounsel.net/survey/viewresults.asp?SurveyNo=187
-Broc Romanek, Editor, CompensationStandards.com 1/9/2013

RE: I have seen many disclosures where affiliates of the compensation consultant provide other services to the company, but I don't recall whether I have seen disclosures where the compensation consultant itself is providing other non-executive compensation related services to the company. I assume that if such services were provided, best practice would be to make disclosure under Item 407(e)(3)(iv), and indicating that the Committee got comfortable that there wasn't a conflict of interest. Would best practice also lean towards not using the compensation consultant to provide compensation services unrelated to executive and non-executive director compensation matters? It's not clear to me that any such services could be provided without there being some conflict of interest.
- 6/25/2019

Q: One of the many issues raised in discussions of clawback or recoupment policies is whether public disclosure of the amounts recovered should be mandated. Shareholder proposals on this subject often ask that a company make such disclosures, provided, for example, that such disclosures do not violate any privacy laws. Let's say that a company claws back cash or equity incentive compensation from a named executive officer that has either been previously paid to the NEO or recoups equity compensation that has not yet vested or been paid out, and which has previously been disclosed in the CD&A, Summary Compensation Table, or the supplementary tables. What are the disclosure effects for future executive compensation disclosures in the company's proxy statement, whether in the CD&A or the comp tables? Many thanks.

RE: It’s still pretty rare for companies to recover previously paid awards under a clawback policy, but when Wells Fargo reduced award payouts, etc., the company discussed it in the CD&A. See pg. 54 of its 2017 proxy statement, pg. 71 of its 2018 proxy statement and pg. 98 of its 2019 proxy statement. Also see the discussion on pg. 107 of the “CD&A” chapter of Lynn, Borges & Romanek's "Executive Compensation Disclosure Treatise.” I don’t think this would have an impact on any of the tables other than potentially “Outstanding Equity Awards at Fiscal Year End.” See pg. 99-100 of the “Summary Compensation Table” chapter and pg. 56 and elsewhere in the “Equity Tables” chapter.

As far as awards that haven’t vested or been paid, if the awards would otherwise appear in the tables then Reg S-K CDI 117.04 indicates that you should still report them there – with a footnote that the award was forfeited (also see CDI 119.25 for non-equity awards). Again, though, it wouldn’t appear in the “Outstanding Equity” table since that’s reporting as of a specific date and presumably the award is no longer outstanding at that time. See pg. 56 of our “Equity Tables” chapter. And it also would be appropriate to discuss in the CD&A.

Here’s a link to the online version of our Disclosure Treatise with all the chapters noted above: https://www.compensationstandards.com/CD/
-Liz Dunshee, Editor, CompensationStandards.com 6/19/2019

RE: Thanks as always for the advice. I recall that in February of this year Goldman took the unusual step of filing an 8-K disclosing some of the possible clawback actions its comp committee was considering in light of the Malaysian investment fund scandal.
-6/20/2019

Q: Mike Melbinger's May 24, 2019, blog post on the seven venial sins according to ISS sent me scrambling for my dog-eared copy of the Baltimore Catechism. My copy is admittedly outdated and therefore does not address issues related to executive compensation, so I turned for guidance to the May 21, 2019, post by John Roe, Head of ISS Analytics, the data intelligence arm of ISS, on the Harvard Law School Forum on Corporate Governance and Financial Regulation. This is what I found on the first venial sin, "Placing excessive focus on TSR-based awards": "For years, companies and their third-party advisors have used total shareholder return (TSR) as a metric in compensation programs. There are a variety of ways to incorporate TSR in the compensation program: base relative TSR metrics (the most common by far), Market Stock Units (MSUs), simple stock price targets, and more. Companies and their advisors sometimes justify the use of TSR as a way to “satisfy investors and their proxy advisors” (although ISS never endorsed this metric and has quite emphatically stated being agnostic about metric selection going back to at least 2012). No matter the TSR award type, it may have some significant issues: • Point-to-point TSR measures over most executive compensation timeframes are more reflective of changing investor optimism than actual delivered performance. TSR is best measured over the long-term—often measured in decades, rather than the three-year performance period in an LTIP cycle. The varying placing of companies during business cycles over a three-year LTIP cycle and the point-to-point nature of most measurement techniques make a relative TSR measure more of a lottery ticket than a performance measure. • Relative TSR awards may be interpreted as a “punt” on the part of the compensation committee. Selecting the right metrics and establishing meaningful goals is hard—there’s no doubt about it. But many companies claim that they implement a TSR program because projecting three years of financial data is simply too difficult for them; relative TSR solves that need by not requiring any projection. But boards should have the means and ability to create such projections, especially if these measures will help establish meaningful goals. • TSR is a levered measure. In a bull market environment—which we’ve seen over the past 10 years—more financial leverage leads to higher returns; often companies with poorer fundamental performance but higher levels of leverage earn higher TSR than a similar company with lower leverage but stronger fundamental performance. However, when the market corrects, the situation will change significantly. • TSR awards do not give managers or investors clear line of sight. It’s hard for a CEO to get up in the morning and focus on “making more TSR.” A CEOs job description should not include “stock price cheerleader-in-chief” as the main focus. Many investors agree that CEOs should focus on resource allocation and productivity, and excessive emphasis on TSR may distract from those priorities. • TSR awards can reward the executive multiple times for the same shareholder wealth creation. Many alternative fund managers (hedge funds or private equity) have a concept of a “high watermark” in their fee structures; they are only paid once on value creation for their own investors. But we don’t often see similar safeguards in TSR-based executive compensation awards. That opens the potential for executives to be rewarded multiple times for creating the same shareholder wealth; the energy industry over the past four years has seen many such cases. Many investors do recognize that having a relative metric in a compensation program is useful to encourage executives to look both outward and inward to assess their performance. And, even if we acknowledge that “cheerleader-in-chief” for the company’s stock price may be an important part of the CEO’s job, it should perhaps be encouraged more modestly. Some companies have chosen to use relative TSR as a modifier, adjusting LTIP payments up or down a moderate amount—say plus or minus twenty percent—as a way to accomplish these two aims. That may be a great way to incorporate TSR into a compensation program without motivating excessive focus. Certainly, there are many other ways to solve this issue that are just as effective." Given the extensive use of TSR by ISS for purposes of assessing pay for performance alignment when making say on pay voting recommendations, I would be very interested in hearing your views on how ISS can reconcile its say on pay voting methodology with the views of its Head of Analytics. Thanks very much.

RE: Interpreting the internal machinations of ISS isn’t an easy task. I think they try pretty hard to keep the Analytics arm separate from the proxy advisor services, and John also noted in his memo that his opinions don’t reflect an official ISS position or a preview of upcoming voting policies. So take that for what it’s worth. But ISS has also been laying the groundwork for more reliance on “Economic Value Added” metrics, and at a high level, these points seem to be in line with its rationale for doing that. Here’s a blog I wrote a few months ago about their EVA analysis: https://www.compensationstandards.com/member/blogs/consultant/2019/03/eva-all-hype-no-nuance.html
-Liz Dunshee, Editor, CompensationStandards.com 6/19/2019

RE: Thanks, Liz. ISS's promotion of EVA as one of its quantitative pay-for-performance screens reminds me of one wag's definition of Philosophy: "The formulation of incomprehensible answers to unanswerable questions." In this case, the unanswerable question is: "How can a proxy advisory firm perform an analysis of CEO pay-for-performance alignment at several thousand public companies within the space of five months or so while ignoring the performance metrics and goals selected by the compensation committee, the individual performance of the CEO, or the company's business strategy or operational performance?" ISS's sudden enthusiasm for EVA may be attributable to its acquisition of a consulting firm that promotes best practices in EVA (whoever decides what those are). Given that very few compensation committees or consultants, if any, are designing incentive compensation plans using EVA as a metric for CEO pay decisions, it's hard to see how ISS's use of EVA will improve the quality of its pay for performance alignment methodology or say on pay voting recommendations. And what will come next after EVA?
-6/20/2019

Q: What is the industry standard or most common approach to counting shares on Form S-8?

RE: That's a longer & more complicated conversation than you might think. Check out the discussion beginning on page 50 of our "Form S-8 Handbook." https://www.thecorporatecounsel.net/GreatGovernance/member/handbook/S-8.pdf
-John Jenkins, Executive Press Inc 6/18/2019

RE: I was typing a response about how practice really varies - but John's cut to the chase. Also see the resources in our "Form S-8" Practice Area. https://www.compensationstandards.com/Member/Areas/FormS-8/
-Liz Dunshee, Editor, CompensationStandards.com 6/18/2019

Q: Instruction 10 to Item 402(u) provides that, where there is a CEO transition, the registrant may use the "PEO serving in that position on the date it selects to identify the median employee and annualize that PEO's compensation." Since the new CEO would, of course, not have been the CEO when the Year 1 median employee was selected, would this mean that, whenever the registrant has a CEO transition and wishes to annualize the new CEO's compensation for purposes of the pay ratio, it needs to identify a new median employee on a date when the new CEO was serving? Thanks.

RE: This was a fairly common point of discussion this past year - and just this week - at JCEB and the consensus was that the change in CEO is not intended to override the ability to use the prior year's median employee determination process. This is just one area where language in the rule is imprecise in a number of areas when applied in the year 2 context.
--Broc Romanek, Editor, CompensationStandards.com 5/10/2019

Q: Given the release of the SEC's final hedging disclosure rules, do you have any intelligence as to the status of the Dodd-Frank pending clawback and pay versus performance rule proposals? I'm unsure whether the answer will depend on the outcome of the 2020 presidential election. Thanks very much.

RE: I haven't heard anything from the SEC, but based on this summary of recent Congressional testimony from other interested parties, it doesn't sound like those rules are on the agenda anytime soon.
--John Jenkins, Editor, CompensationStandards.com 5/2/2019

Q: I’ve reading through some proxy statements and finding something I find pretty strange: CEOs and other top folks getting paid dividends on unvested restricted shares or, as I like to think it, shares they don’t own yet. I’m curious how many companies offer this perk. I seem to remember GE halting these payments a few years ago.

RE: Based on findings from the 2016 Domestic Stock Plan Design Survey, cosponsored by the NASPP and Deloitte Consulting:
75% of dividend-paying companies report that restricted stock awards are eligible for dividends, 78% for RSUs

For restricted stock:
- 51% pay dividends to employees in cash when paid out to the shareholders
- 29% pay dividends to employees in cash when underlying award is paid out
- 18% reinvest dividends into additional restricted stock and pay to employee when underlying award is paid out
- 2% payment decision up to the employee

For RSUs:
- 40% reinvest dividends into additional restricted stock and pay to employee when underlying award is paid out
- 34% pay dividends to employees in cash when underlying award is paid out
- 23% pay dividends to employees in cash when paid out to the shareholders
- 3% payment decision up to the employee/other
In summary, for restricted stock, 51% pay dividends when paid to shareholders, and 47% wait to pay dividends until the underlying award is paid out. For RSUs, 74% wait to pay dividends until underlying award is paid out, and 23% pay out at the same time as shareholders.
--Broc Romanek, Editor, CompensationStandards.com 4/9/2019

Q: Is there any guidance from the NYSE suggesting that the shareholder approval requirements of 303A.08 do not apply when an MLP whose common units are listed on the NYSE proposes to amend an equity incentive plan to substantially increase the number of units reserved for issuance thereunder (as opposed to when a corporation proposes to amend a plan to substantially increase the number of shares reserved for issuance thereunder)? I note the introduction to the corporate governance guidelines expressly excludes LPs from 303A.01, 303A.04 and 303A.05, but it then goes on to state that LPs remain subject to all other provisions of 303A, which I would read to include 303A.08. No guidance exists in the FAQs on equity comp plans under 303A.08 or the more general FAQs under 303A, or under the voting rights interpretations. I believe that unitholder approval would be required, but client is hearing from other sources that such approval is required only for corporations, not MLPs. I believe they may be confusing IRS requirements for shareholder approval of plans with qualified options with NYSE governance rules. But would appreciate either concurrence or any support for the contrary view.

RE: There's no formal NYSE guidance that has been published. But this is a position that NYSE has informally signed off on. The logic is that the MLP partnership agreement only allows unitholders to vote on certain matters, which typically do not include equity compensation plan matters. I have taken this approach for two MLPs now. You should email Cindy Melo (Manager of NYSE Regulation) with your fact pattern and request concurrence that your MLP does not need unitholder approval to amend/adopt an equity compensation plan. I received an email from Cindy, who was in agreement, both times I reached out.
--4/9/2019

Q: Does anyone know where I can find a 50-state blue sky survey of employee benefit plans? Thanks.

RE: Maintaining a 50-state blue sky survey is a full-time job for some lawyers at bigger law firms (as there are constant changes) - but I believe this issue only comes up if you don't register on an S-8. In the March-April 2005 issue of The Corporate Counsel, this issue was addressed: "What's the consequence if some plan transactions technically end up not being covered by S-8? The Staff prefers registration, because it wants the higher liability standards of Section 11 and 12(a)(2) to apply. If not enough shares are registered, some purchasers may have a rescission right, there may be Enforcement exposure, and Blue Sky law exemption/ qualification of non-listed issuers may be affected in certain states ( e.g., Pennsylvania). Moreover, counsel may be unable to issue a clean legal opinion (in a deal, etc.), and the auditor may get nervous. How could the alternative of registering on a gross counting basis be more burdensome than toiling with the auditor over whether there is an internal control problem lurking here, or worse?"
--Broc Romanek, Editor, CompensationStandards.com 9/22/2005

RE: How does the S-8 help with state/blue sky compliance? I was thinking plan awards that are derivative securities (RSUs, DSUs, phantom stock, etc.) may be "covered securities" if they are considered equal rank to a listed security, but I'm not aware of SEC guidance on this point. Do you know?
--4/3/2019

RE: Some states have language in their employee plan exemptions that limits its application to securities that are registered under the Securities Act or are issued under Rule 701. (Ohio is one - See OAC 1301:6-3-03E(5)). If you're an Exchange Act reporting company, you aren't eligible for Rule 701, so if you didn't have an effective S-8, you wouldn't be able to rely on this exemption if you needed it. Whether you need an exemption or not depends on whether the derivative securities you're issuing are "covered securities." Unfortunately, I don't think there's anything definitive from the SEC or the courts on that. But I can tell you that the Blue Sky folks probably think there is some uncertainty as to whether they are included in the "equal or senior in rank" language. That's because the 2002 Uniform Securities Act added language in the section exempting covered securities to exempt options, warrants & rights, which at least one commentator on that Act has said "are not themselves federal covered securities under NSMIA." (Robert N. Rapp, Blue Sky Regulation, Section 7.04, 2nd Ed.) While the existence of this language may potentially help you in the states where it's been enacted, it may also provide other states with an argument that your derivative securities aren't covered securities under NSMIA. 2004).
--John Jenkins, Editor, CompensationStandards.com 4/3/2019

Q: Many issuers register the interests in deferred compensation plans on Form S-8 for purposes of federal securities compliance. With respect to Blue Sky compliance, if the issuer’s common stock is registered on an exchange, may the issuer rely on NSMIA, Section 18(b)(1) of the Exchange Act, which includes in the definition of “covered security,” “ a security of the same issuer that is equal in seniority or that is a senior security” to a security traded on the exchange?

RE: I think this would depend upon whether the the company plans to issue under the plan solely to those who are existing security holders in which case this would likely work (but still may require a NY notice filing), or if the issuer intends to issue/sell "to the public" and those not yet a security holder (security holder includes option, warrant, note holders) and this reliance won't work because of the agent issue. I'm assuming these are "plans" as would be defined as employee benefit or similar compensatory plans?
--Broc Romanek, Editor, CompensationStandards.com 7/8/2010

Q: A public company client is presently negotiating a LOI on an acquisition, which would be material if completed. Members of the board are fully aware of the status of the proposed negotiations. As a matter of historical practice, the company has made an annual grant of restricted stock to directors as a part of their compensation. I've read some of the articles on this website dealing with spring-loaded options, but haven't seen much discussion on whether there is a similar issue with granting shares of restricted stock in advance of good news. Do the fiduciary duty and insider trading concerns raised in the spring-loaded option context apply with grants of restricted stock?

RE: Yes, as this Jones Day memo points out, spring-loading can be an issue with virtually any type of equity grant: "Although the media focus to date has been on stock option plans because of the accounting and tax implications, similar issues may arise for restricted stock, restricted stock units, or other equity-based forms of compensation where the timing or value of the grant is tied to the value of the award."
--John Jenkins, Editor, CompensationStandards.com 4/1/2019

Q: If life insurance premiums are paid pursuant to a non-discriminatory plan and therefore can be generally omitted from disclosure pursuant to 402(a)(6)(ii) are the premiums not required to be reported pursuant to 402(c)(2)(ix)(F)?

RE: You are correct - amounts for plans specifically referenced in Item 402(a)(6)(ii) need not be included in the compensation tables. Item 402(c)(2)(ix)(F) would pick up the amounts paid for life insurance available to the NEOs that is only available on a discriminatory basis. So, for example, premiums paid on your typical group life insurance plan available to all salaried employees would not need to show up in the All Other Compensation column of the SCT. One thing that I always like to point out about Item 402(a)(6)(ii) is that it is an exclusive list - so if you have a non-discriminatory benefit plan that is not a life, health, hospitalization or medical reimbursement plan, then you have to include the compensation arising under the plan in the All Other Comp Column (or another appropriate column) of the SCT, even if it is non-discriminatory.
--Dave Lynn, Editor, CompensationStandards.com 10/4/2007

RE: If a company pays life insurance premiums for an NEO that need to be reported because the life insurance offered does discriminate in favor of executives, do you need to count those premiums in the NEO's perks tally - for determining if the NEO's perks equal or exceed $10,000? 402(c)(2)(ix)(A) specifically requires reporting perks (when they equal or exceed $10k); whereas 402(c)(2)(ix)(F) specifically requires reporting life insurance premiums (regardless of the NEO's perks tally). I have always thought this differentiation between 402(c)(2)(ix)(A) and (F) means that life insurance premiums are not "perks" and do not get included in the 402(c)(2)(ix)(A) counting. But I see "life insurance premiums" frequently listed as possible perks.... --3/29/2019 RE: I don't think the Staff has specifically addressed this, but it seems to me that the answer likely is yes, even though premiums for discriminatory life insurance are called out specifically for disclosure in the "All Other Compensation" column. The definition of perk is slippery, and if you look at Chapter 7 of the Executive Compensation Disclosure Treatise, it notes that insurance premiums are among the items that could be characterized as perks. See the list of potential perks on pgs. 35-36 & the responses to various questions concerning insurance situations on pgs. 44-46. --John Jenkins, Editor, CompensationStandards.com 3/30/2019

Q: A client is looking for sample cryptocurrency/token plans or agreements. Does anyone have any such samples or is anyone aware of a good resource for same? Many thanks.

RE: I can ask around for sample agreements. In the meantime, if you haven't checked out the transcript from our recent webcast on cyrpto compensation, that could also be a good resource. It lists some drafting issues to think about and has a lot of other info. It's posted in our "Cryptocurrency Comp" Practice Area.
--Liz Dunshee, Editor, CompensationStandards.com 3/27/2019

Q: For a company that does have perks to report in the CD&A and Summary Compensation Table's All Other Compensation column, do the SEC rules require the company to actually use the word "perk" or "perquisite" in the proxy statement? S-K, item 402(c)(ix)(A) refers to "Perquisites and other personal benefits," suggesting that there may be personal benefits that are not perquisites...but I haven't been able to think of a reportable personal benefit that is not also a perquisite. The reason for the question...company is considering referring to "other personal benefits" (instead of the term "perk" or "perquisite") in the proxy disclosure. It seems to me that readers will understand that "other personal benefits" = "perks", so there should be no confusion caused by the absence of the specific word "perk" or "perquisite;" but I wonder if the SEC's use of the phrase "Perquisites and other personal benefits" in 402(c) means that the SEC views them as two different things, in which case, if you have perks to discuss/report, you should call them by their name (i.e., perks or perquisites). Appreciate your thoughts!

RE: Alan Dye notes: I don't think it's necessary to characterize a perk or other personal benefit as a perquisite. The rule and the interps included in the adopting release refer to "perquisites and other personal benefits," which indicates that a perk is a personal benefit, and there may be other "items" (as the guidance says) that are 'personal benefits' even if not characterized as a 'perk.' I'm not sure what might constitute a personal benefit but maybe not a perk, but I don't think it matters--both are personal benefits, and they can be characterized as such in the proxy statement. They'll have to be described with some specificity in the description of the "all other comp" number, so that no one is going to be misled by calling them a 'personal benefit' instead of a 'perquisite.'
--Broc Romanek, Editor, CompensationStandards.com 3/8/2019

Q: Our client declared a stock dividend on its outstanding shares mid year 2018. Does this mean for it's outstanding equity awards table in the 2019 proxy, it should adjust the pre-dividend number of shares / options to reflect the dividend? And if so, how many years back would we need to go? Is there an alternative way to handle this? Any guidance would be appreciated. Thanks.

RE: I'd adjust all the awards that have been affected by the stock dividend. Check out Alphabet's 2017 proxy statement and footnote 2 to the Outstanding Equity Awards table.
--John Jenkins, Editor, CompensationStandards.com 3/4/2019

RE: Reviewing Alphabet's proxy was very helpful, thank you very much.
-- 3/5/2019

Q: My recollection is that it is not permissible to revise the captions for the columns of the Summary Compensation Table (or any of the other supplemental tables) to better reflect the dollar values disclosed in that column. In our case, we don't need to disclose any above-market or preferential earnings on non-qualified deferred compensation in the column captioned "Change in Pension Value and Non-Qualified Deferred Compensation Earnings" and disclose in a footnote that the number represents the change in pension value for the previous year. Hence my question: Are we permitted to change the caption for that column to read only "Change in Pension Value"? Thanks very much.

RE: I don't think that's permitted. I think the advice in the old telephone interps still represents the Staff's position on changing the language of the tables: "The compensation disclosure rules do not, as a general rule, permit registrants to deviate from the highly formatted tabular presentations required except to omit any column or table otherwise not applicable. A limited exception has been made for the caption of column (b) in the Option/SAR Exercise table. The caption to that column may be modified to read: "Number of securities underlying options/SARs exercised." In all cases, the gross number of securities underlying the options/SARs exercised should be reported in this column."
--John Jenkins, Editor, CompensationStandards.com 2/8/2019

Q: Hi, Instruction to 402 states "Specify the applicable fiscal year in the title to each table required under this Item which calls for disclosure as of or for a completed fiscal year." What does this mean for the Summary Comp Table, which a table for 3 completed fiscal years? Are we required to include the year in the name of that table? Thank you!

RE: In practice, most companies don't do that, although I recently looked at Apple's and they do. Most of the tables I've seen reference the most recent year (that's what Microsoft does. Some just use "Summary Compensation Table" as a title. Most will reference the 3 fiscal years in the lead in paragraph to the tables in any event.
--John Jenkins, Editor, CompensationStandards.com 2/7/2019

Q: For the pay ratio disclosure, a client was anticipating using the same median employee as last year. The median employee quit in late November, i.e. one month before the end of the client's fiscal year. Is it permissible to annualize the employee's compensation for purposes of the pay ratio disclosure, or must the client determine a new median employee? Instruction 5 to Item 402(u) addresses annualizing, but does not seem directly on point. Neither did I find much clarity in the adopting release.

RE: Mark Borges notes: I believe that this situation is addressed by Instruction 2 to Item 402(u): “If it is no longer appropriate for the registrant to use the median employee identified in year one as the median employee in years two or three because of a change in the original median employee’s circumstances that the registrant reasonably believes would result in a significant change in its pay ratio disclosure, the registrant may use another employee whose compensation is substantially similar to the original median employee based on the compensation measure used to select the original median employee.” It seems to me that the departure of the original median employee from the company is the type of change in circumstances that is contemplated by this provision. Thus, I believe that this provision would apply. Consequently, I would recommend using another employee from the company’s original determination of the median employee with substantially similar compensation as the original median employee as the new median employee for purposes of year two. This would avoid the need to identify a new median employee, and also sidesteps the question of whether it is advisable to use an individual who is no longer with the company as the median employee in year two. Of course, I would add a brief statement explaining that the original median employee has been replaced by another individual whose actual total compensation for year two is being compared against the year two compensation of the Chief Executive Officer to come up with the year two pay ratio.
--Broc Romanek, Editor, CompensationStandards.com 1/3/2019

Q: I believe it has been clearly settled that the Item 201(d) Equity Compensation Plan table should either go in Part III, Item 12 of the 10-K or in the proxy statement incorporated by reference into the 10-K. However, thecorporatecounsel.net has a memo posted in its Disclosure Reform practice area from the SEC Institute that contends that the disclosure simplification final rules made changes to Item 201, Form 10-K Item 12 and Schedule 14A that clarify that the table should be located in Part II, Item 5 of the 10-K. See pages 9-11 of the SEC Institute's memo. When I look through the final rule from the SEC, I don't see those changes. Is anyone else aware of this possible change?

RE: The rule hasn't changed at this time. There's been some confusion over this, because the SEC originally proposed to delete Item 201(d) and the references to it in Part III of Form 10-K and Item 10(c) of Schedule 14A. And that deletion was reflected in the "Demonstration Version" that was initially published when the rule was finalized. But page 54 of the final rule actually says that the SEC is retaining the disclosure requirements and referring them to FASB for potential incorporation into GAAP. This "non-change" is reflected in the final "Demonstration Version" that was conformed to the Federal Register.
--Liz Dunshee, Editor, CompensationStandards.com 12/17/2018

Q: Our unvested non-employee Director equity grants forfeit for all board service termination events except for death or disability. If a Director resigns or is not elected at any point during the one-year vesting period, their equity is forfeit. Is this common practice? Any guidance or market data source on termination treatment for Director equity grants other than scouring public disclosures?

RE: Mike Melbinger notes: That is a fairly common practice for director awards with a one-year vesting schedule
--Broc Romanek, Editor, CompensationStandards.com 12/14/2018